Put a tax-deferred investment, like a variable annuity, inside an already tax-deferred IRA or retirement account.

Many financial advisers say this usually is a bad move. Yet, nearly one-half of all variable annuity sales are in IRA rollovers, the National Association of Variable Annuities, Reston, Va. has reported.

Is this appropriate?

First, understand that a variable annuity is a contract with a life insurance company. With it, you can do your own investing in a selection of investment options tax-deferred. When you retire, you have the option to withdraw funds or "annuitize" the contract so that you get periodic income for life.

The idea behind putting the variable annuity inside an IRA often is to obtain insurance guarantees. At least, that's according to Brandon Buckingham, director of qualified plans and special markets attorney for John Hancock Annuities, Boston. Those guarantees include:

Guaranteed death benefit. When you die, your beneficiaries are guaranteed to receive the principal or market value of the annuity, whichever is higher.

Guaranteed Minimum Withdrawal Benefits. With these guarantees, you're promised a return of at least all your contributions--regardless of how the underlying investments perform. The guarantee can come in the form of regular withdrawals paid over a specific period. One popular type of guaranteed minimum withdrawal benefit, for example, promises a five percent withdrawal rate annually for life starting at age 65--regardless of how the market performs or how long you live.

Guaranteed Minimum Income Benefit. With this, you can receive a guaranteed dollar amount in monthly income--regardless of how the contract's investments perform.

Annuities in IRAs, Buckingham says, also can help transfer wealth to family members. For example, a variable annuity beneficiary can withdraw in installments over his or her life expectancy. The undistributed amount continues to grow tax-deferred.

Plus, we've heard some advise putting a variable annuity inside an IRA for tax protection when you withdraw. While variable annuities are "tax-deferred," you'll still owe ordinary income tax--which can run as high as 35 percent--when you withdraw. By sheltering it in another tax-advantaged retirement account, you might postpone or eliminate these taxes.

Jane King, president of Fairfield Financial Advisors, Wellesley, Mass., notes the average variable annuity charges more than two percentage points annually. Tack on the added cost for features, such as a guaranteed minimum withdrawal benefit, and you can wind up paying 2.50 percentage points to more than 2.85 percentage points anually. You also need to consider surrender charges if you withdraw early.

On top of that, King says, many insurance companies prohibit you from keeping all your money in stock funds, which over the long term, typically perform best. Bottom line: Your variable annuity's net return, after expenses, often is not great.

A 60 percent stock-40 percent bond mix historically has grown at more than 8 percent annually since 1926, according to Ibbotson Associates, Chicago. Subtract 2.85 percent in annuity charges, and your annual rate of return could drop with a thud, to say, 5.15 percent.

That's not so much different from what you might expect from a bank deposit, which has the added advantage of a government guarantee.

King prefers to invest IRA rollovers in no-load, low-cost mutual funds. She diversifies in growth and value stock funds, international funds, bonds and money funds for attractive risk-adjusted rates of return.

She prefers that retirees use up their non-retirement savings assets first, leaving the retirement account to grow in value--even while taking the minimum required distributions.

The tax-deferred IRA can be left to a child as an inherited IRA. Then the child can take distributions based on his or her life expectancy.

If you consider a variable annuity, always evaluate the financial strength of the insurance company and all the fees involved. Strive for the lowest cost possible.

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Spouses Gail Liberman and Alan Lavine are syndicated columnists. You can purchase Alan Lavine & Gail Liberman's latest book Quick Steps to Financial Stability (QUE Publishing 2006) online at www.moneycouple.com or at your local bookstore. E-mail them at MWliblav@aol.com.